Ask John: Will Anime Distribution Ever Go All Digital?

Question:
Do you foresee the future of anime releases in both Japan and the U.S. being in digital format only? I’ve read multiple articles on the subject of people preferring to watch anime via websites like Netflix, Hulu and Crunchyroll over hard disk formats like DVD and Blu-Ray. Do you think that companies that release anime in the U.S. and Japan will go to all digital releases in the future? What would the pros and cons be of such a maneuver?

Answer:
Practical necessity is requiring an unprecedented migration from physical video distribution to digital distribution. While consumers may appreciate the convenience of streaming anime delivery, increasingly an even larger number of American consumers are simply unwilling or unable to purchase anime on physical media. With DVD sales shrinking and Blu-ray sales failing to compensate, distributors are finding that they need to utilize streaming distribution to supplement their distribution and generate consumer awareness and brand loyalty. However, digital distribution has its own disadvantages and shortcomings which will probably prevent it from ever entirely supplanting physical media distribution.

Despite tremendous increases in global anime digital distribution, streaming anime still doesn’t generate tremendous profit. For example, according to industry whispers, Crunchyroll has not seen its user base grow significantly while operation costs have increased. American consumers presently pay an average of a few dollars per episode to own anime on physical media. Japanese consumers pay exponentially more, and increasingly American consumers can expect to pay Japanese prices for select titles like Kara no Kyoukai and Fate/zero. On the other hand, patrons of streaming sites pay a single, small flat fee to watch as much anime as they choose. While physical disc distribution entails a variety of production and distribution costs, physical media sales also generate revenue. Streaming distribution may have lower costs, but it still does have expenses while it doesn’t generate significant revenue. Online advertising pays very little because web advertising has yet to definitively create consistent sales increases. While anime producers and distributors can rely on physical disc sales revenue to recover costs, they can’t rely on the minimal income from streaming distribution to pay for new anime licenses, production, and development.

Japanese distributors may continue to encourage limited online distribution in order to cultivate an international market and create brand name recognition. FUNimation, Sentai, and Viz, in particular, utilize streaming distribution to attract traffic, generate brand loyalty, and advertise physical media releases. American online exclusive anime distributors including Crunchyroll and NicoNico don’t appear to be steadily growing. Rather, they’re simply maintaining. If the domestic market for physical discs entirely vanished, I envision that we’d see a majority of domestic anime streaming also evaporate rather than increase to fill the void. Streaming simply doesn’t pay the bills, but distributors have to increasingly rely on streaming anyway because the alternative appears to be ceasing distribution entirely. The Japanese market continues to be supported by a very devoted following of hardcore otaku collectors that appreciate physical disc releases and continue to be willing to purchase physical disc releases. So in both America and Japan, physical disc sales continue to generate much of the revenue that supports anime production and distribution while streaming is largely just a supplemental advertising method that sustains itself but doesn’t generate profit.

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Part of the reason is the streaming model; it’s simply not expensive enough to cover costs. Selling episodes individually or by season for download is probably the best way to generate profit. $7 a month to legally watch all the anime available on a service is an amazing value. Even a $2 to buy an episode isn’t too bad for a new release. The streaming subscription model isn’t high enough, overall. I don’t see how anyone can make money off of that.

The downside to this is people will probably just go back to downloading fan subs if they deem the cost too high.

Then there are old fogies like me who demand a physical copy even if it costs more in the end. Given the choice between owning an actual product that can watch years from now, download a file that could be taken down by a virus or hard drive crash, or taking my chances a title won’t be removed from the streaming service, I’ll spend my money on something I can own. Unless a disaster happens or I do somethign foolish to damange that DVD, my collection is relatively secure.

Despite my insistence on clinging to aging business models, I realize physical media is gone in my lifetime. When it comes to shifting an entire business model from actual goods to pure information, consumers are resistant overall, but by baby steps and new generations of consumers, things will get there.

Finding a healthy middle ground between the $50-$100 price tag on DVDs and Blue Rays here in Japan and the choices the non-Japanese market have.

I don’t think selling episodes for $2 each is going to work when customers can click a similar button to get the same show saved on their hard drive for free.

There is a certainly level of convenience that comes with services like crunchyroll and hulu+ that let’s their consumers know that they will be free from viruses and get a quality dub/sub. They also don’t have to search around. Still, I don’t think those customers want to go on a Naruto-watching binge and wake up the next day with a $60 bill!

If you want to make some money and secure the audience you need to sell a DVD with GREAT extras and add-ons. Make that customer feal good for buying something, and they’ll be fine.